Output from factories fell sharply in June as the extra bank holiday for the Queen's diamond jubilee meant longer shutdowns for manufacturers. But the 2.9% drop in production was smaller than had been feared by the Office for National Statistics (ONS), raising hopes of a small upward revision in growth estimates for the second quarter of 2012.

City analysts had been braced for a much bigger impact from the double bank holiday following the 6% drop in output between May and June in 2002, when there was also an extra day off to celebrate the golden jubilee. They warned, however, that the outlook for UK industry remained challenging given the sovereign debt crisis in Europe and the weakness of domestic demand.

The ONS said it now believed industrial production – which includes North Sea output and electricity and gas supply in addition to manufacturing – contracted by 0.9% between the first and second quarters of this year, compared with the 1.3% fall that was used to calculate the growth figures. Official figures released last month showed that the economy remained in a double-dip recession after a third consecutive drop in gross domestic product.

Chris Williamson, analyst at Markit, said: "The shallower drop in production means GDP should be revised up from -0.7% to -0.6%, but that clearly still indicates a steep downturn. Stripping out the jubilee effect, thought to have depressed GDP by as much as 0.5%, leaves a slightly more encouraging picture of an economy broadly stagnating in the second quarter, which is much more in line with the modest growth signalled be the business surveys."

Lee Hopley, chief economist at EEF, the manufacturers' organisation, said: "Our feedback suggests that confidence remains fragile, but there are still bright spots to be found in some export markets. The question is whether July's data will confirm that output was simply displaced or if this is the beginning of a more worrying downward trend."